The Coming Health Care Collapse: Balancing the Costs of Supply and Demand

The health care industry is the fastest growing employer in the United States. According to the Bureau of Labor Statistics, the industry is estimated to contribute 3 million additional jobs between 2008 and 2018, adding to the 14.3 million wage and salary workers as of 2008. The labor growth in health care is a result of increasing demand. The pace of hiring is greater than the pace of lay-offs, which makes me wonder if this is sustainable. During the recession, the health care industry maintained its standing as a major employer, despite short term lay-offs. A high skilled medical professional at a struggling hospital is able to relocate to another hospital that is busy expanding to fulfill increasing demand. However, patient demand places a strain on capacity and costs. The short-term layoffs, weaker job growth, and increasing costs expose the reasoning behind the coming health care collapse.

Hospitals are struggling to break even, and the results are painful. In April 2010, St.Vincent's Medical Center, a major hospital in downtown NYC, closed its doors. With approximately $750 million in debt, and no way of controlling increasing costs, St.Vincent's reached its shut down point. A major blow to NYC, as the last Catholic General hospital after 160 years in operation left the entire lower West Side of Manhattan without a hospital. St.Vincent's had a 6 month struggle with a budget deficit, and suffered an earlier bankruptcy prior to its closing. The bankruptcy apparently did nothing to restructure the financial model of the hospital. The State of New York issued $9 million in emergency loans to cover payroll, but this too was not enough. The community fought tirelessly to keep the hospital open, and a glimmer of hope arrived as Continuum Health Partners and Mount Sinai Hospital came on board to bid on a buy-out. However, a team of accountants deemed St.Vincent's an unsustainable investment. Also, there is word that state government chose to shy away from helping to structure a bidding process. Previous employees in the billing department have spoken up, stating that the St.Vincent's was very generous in providing care to poor patients. There was a lot of missing reimbursements for Medicare and Medicaid, and accounts receivables grew too cumbersome to manage. Sadly, this is true with other hospitals across the country.

Last year, President Obama, while promoting his health care plan, praised Cleveland Clinic and Mayo Clinic as the model hospitals that work to reduce costs. Weeks later, Cleveland and Mayo refused to serve Medicare patients in its Arizona locations; citing many missed reimbursements - and even the payments that were received did not cover the full cost of care. This coming from hospitals that are a model for cost reduction is a huge blow to the government who can not keep its promise. What about the many hospitals that are in worse shape, that didn't get the pleasure of being hailed as the model clinic? Government continues to make promises that it cannot keep.

The Pennsylvania Health Care Cost Containment Council has kept record of its growing list of hospitals that have closed or merged. University Medical Center, the hospital that treated Congresswoman Giffords after her gunshot wound to the head in an attempted assassination, decided to use this opportunity sue the US Department of Health and Human Services over Medicare reimbursements. Also, Congresswoman Giffords worked hard to keep the trauma center open amidst budget constraints; the one which saved her life. In my area, Our Lady of Mercy Hospital in the Bronx faced bankruptcy and was on the brink of shutdown. Fortunately, weeks before the birth of my little sister, the hospital was rescued by Montefiore, a huge conglomerate of failed medical centers in the North Bronx. Hospital mergers have formed a strong pact to pressure government to pay its fair share of promised reimbursements. Benefiting from economies of scale, these large hospital conglomerates are closely tied with politics, funneling campaign cash, and doing whatever is necessary to cover costs. The US health care industry is in a desperate situation.

The cost of serving the poor is an issue. Media tends to be biased in exposing the faults in Medicare (government health care for the elderly) opposed to Medicaid (government health care for the poor). My mother worked as a medical biller throughout the 1990's, and she recalls many situations in which Medicaid patients were not reimbursed. After several attempts, the billing department is then instructed to contact the patient for payments, with the excuse that Medicaid is not able to cover the visit. Patients have the choice to enroll in a payment plan, or pay all up front and deal with the local Medicaid office themselves; thereby transferring the reimbursement burden on the patient rather than the hospital. Also, a lot of government programs have strings attached. For all of the blame that private insurers receive, it's almost laughable that government fails to realize that Medicare and Medicaid operate the same way. They all cover certain services, while refusing to cover others. The only difference with government plans is that the insurance pool receives a large percentage of its funding from the government via taxpayers. Increasing demand through government funding does nothing to bend the cost curve from the supply side.

Hospitals need to improve their responsibility based cost measurement systems. Overhead is the continued expense to operate the hospital, and the costs are either direct (equipment) or indirect (administrative and miscellaneous). The hospitals budget these expenses based on the past and future expectations of demand. The goal going forward should increase under applied overhead - spending less than budgeted in order to cover funding gaps such as missed reimbursements. Next, hospitals must do a better job at tracing indirect costs and match it up with specific procedures. Capacity is strained with increasing patient demands; more occupied space comes with additional costs such as paperwork, additional staff responsibilities, food, etc. Operating leverage will be the make or break portion in this game-plan. Fixed costs that go directly into any service is usually uncontrollable; the procedure equipment, softwares, building services etc are there to stay. The variable costs are controllable - often indirect that naturally come about with an increase in patient demand. Operating leverage is made up of the ratio of fixed costs to total costs -- if this number is high, it means that the hospital is at high risk. We're trying to avoid shutdown when costs are greater than revenue. The problem is that indirect costs are often brought about when the hospital places extra effort in recovering reimbursements, which in turn don't cover variable costs, cancelling out the overall funding of the increasing demand from patients who think they are being covered. This is the danger in the health care system.

Solutions to this problem are open for discussion. Leave a comment.